1. This is an appeal filed by the assessee. The relevant assessment year is 2002-03. The appeal is directed against the order of the Commissioner (Appeals) XI at Mumbai dated 24-6-2003. The appeal arises out of the assessment completed under Section 143(3) of the Income Tax Act, 1961.
2. The first ground raised by the assessee in this appeal reads as follows: The learned Commissioner (Appeals) XI erred in confirming that the Appellant was not entitled to depreciation of Rs. 14,03,100 in respect of premium paid for acquiring office premises amounting to Rs. 1,40,31,000.
3. The assessee had acquired office premises during the previous year under appeal, at Barodawala Mansion, Worli. The premises were acquired as tenants. As part of the deal, the assessee had paid the amount of Rs. 1,40,31,000 for acquiring the premises on perpetual lease. The amount was paid by the assessee to the outgoing tenants for vacating the premises earlier held by them. The owners of the property are not liable to return the said amount or any part thereof to the assessee on vacating the premises. In fact, premium was paid by the assessee to the erstwhile tenants upon which the landlords do not have any liability to account for.
4. The case of the assessee is that the assessee has acquired a right in the property in the nature of tenancy rights by paying an amount of Rs. 1,40,31,000 by way of premium. The right in the said property as tenants is a transferable asset and after the new Rent Control Act, acquisition of premises on perpetual lease by payment of premium is one of the recognized methods of acquiring the property. The assessee, therefore, capitalized the amounts in its books of account and claimed depreciation at 10 per cent per annum. This was denied by the assessing authority as well as by the Commissioner (Appeals). Therefore, the issue has come before us.
5. Sri Percy J. Pardiwalla, learned Counsel appearing for the assessee argued the issue at length. The learned Counsel invited our attention to Section 32(1)(ii). The said clause reads as follows: Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1-4-1998....
6. The learned Counsel submitted that with effect from the assessment year 1998-99, the depreciation is available not only on tangible assets like building, machinery, etc., but also on intangible assets like trademarks, licences, etc. What the assessee has acquired by way of perpetual lease is a licence. Licence is to occupy and utilize the premises for the purpose of business/profession carried on by the assessee. It is a transferable right. So the payment made by the assessee partakes the character of a transferable right in the form of licence which is classified under intangible assets for the purpose of depreciation allowance.
7. The learned Counsel also argued that the term 'owned' as occurring in Section 32 must be assigned a meaning to cover any one in possession of the property in his own exercising such domicile over the property as would enable others being excluded therefrom. The concept of depreciation suggests that tax benefit legitimately belongs to one who invested in the capital asset and utilized the asset thereby losing the investment by wear and tear. He also submitted that the owners of building have furnished a certificate to the effect that they had not claimed depreciation on the building.
8. We considered the matter in detail. The right acquired by the assessee is tenancy right. Capital gains on surrender of tenancy rights are specifically covered by Section 55, Sub-section (2)(a). The capital gains on transfer of depreciable assets are governed by Section 50.
Section 50 does not deal with tenancy rights. Otherwise, again the tenancy rights are not recognized as depreciable rights under the Income Tax Act.
9. Therefore, the only point to be looked into is, in the light of the argument of the learned Counsel, that whether Section 32(1)(ii) does have any application on the issue that to treat the premium paid by the assessee as an intangible asset eligible for depreciation. The argument is that rights acquired by the assessee should be held as "licence".
The other items like know-how, patents, copyrights, trademarks, franchises or any other business or commercial rights are far away from the rights acquired by the assessee by paying the premium to the erstwhile tenants. The only expression which deserves to be considered in this context is "licence". The expressions know-how, patents, copyrights, trademarks, licences, franchises are followed by the general words "or any other business or commercial rights of similar nature...." Therefore, it is necessary to read and understand the different expressions including "licences" in the light of the expressions following thereafter that "any other business or commercial rights of similar nature". It means know-how, patents, copyrights, trademarks, licence, franchises, etc., need to be similar in nature pertaining to business or commercial rights. It follows that all the above expressions are placed at a same level with similar nature and relating to business or commercial rights. In that sense, the expression "licence" cannot be singled out from business or commercial nature of rights and held as a right referable to tenancy of immovable property. If one applies the principle of "ejusdem generis", the term "licences'1 has to be read in the company of the preceding terms like know-how, patents, copyrights and trademarks and also the following words franchises or any other business or commercial rights of similar nature. The ejusdem generis rule is the rule of generic words following more specific ones. The rule is that when general words follow specific words of the same nature, the general words must be confined to the things of same kind of those specific. The specific words must form a distinctive category. This rule reflects an attempt to reconcile the incompatibility between the specific and general words.
10. In Section 32(1)(ii), the expression "licences" have been provided in the company of expressions like know-how, patents, copyrights, trademarks, franchises which are in the nature of business or commercial rights. The tenancy rights acquired by the assessee cannot be equated with the licence provided under Section 32 so as to qualify it as an intangible asset eligible for depreciation. Therefore, in the facts and circumstances of the case, we find that the lower authorities are justified in treating the premium amount not eligible for depreciation.
11. The assessee has paid the premium to the vacating tenants. When the assessee is vacating the premises and giving it to new tenants, the assessee can collect the premium from the new tenants as the assessee had paid premium to the former tenants. That is the way of recovery, if at all necessary for the assessee to get back the amount of premium paid. It cannot be treated as intangible asset for claiming depreciation as provided under Section 32.
The learned Commissioner (Appeals) erred in confirming that out of the total expenditure of Rs. 20,58,374 a sum of Rs. 15,44,079 incurred by the appellants on repairs and maintenance was required to be considered as capital expenditure and not revenue expenditure.
14. We have gone through the details of expenses incurred by the assessee in repairing and maintaining the premises acquired on lease.
In fact, those expenses were incurred by the assessee to make the premises suitable for accommodating the office and functioning of the assessee. Those expenses could not be held as capital expenditure. The expenses were incurred by the assessee for updating the facilities of water supply, electricity supply and other office arrangements. These expenses are in the nature of repairs and maintenance. Therefore, we find that the lower authorities are not justified in treating the sum of Rs. 15,44,079 as capital expenditure. The assessing authority is directed to treat the amount as revenue expenditure eligible for deduction. But, if any depreciation has been granted on the said amount, the same shall be withdrawn.
The learned Commissioner (Appeals) erred in confirming that 1/8 of the motor car expenses detailed below were to be considered for disallowance on account of personal use by partners particularly in view of the provisions of Section 38(2).
Without prejudice to what has been stated above, it is respectfully submitted that for computation of such disallowance, interest on bank loans on cars need to be excluded in computing the said disallowance.
Without prejudice to what has been stated above, it is respectfully submitted that the disallowance for personal use of motor cars is excessive.
16. The element of personal use in respect of motor cars has to be considered in case as the assessee has not maintained meticulous details of running of cars through log books. The general contention of the assessee is that motor cars were not used for the personal use except for a sum of Rs. 65,000 already disallowed by the assessee. So the personal user is already established. The assessee itself has disallowed the amount of Rs. 65,000. This has been increased to Rs. 1,47,252 by the assessing authority. We are of the considered view that the quantum of disallowance made out by the assessing officer is just and proper in the present case. This ground is, therefore, dismissed.
The learned Commissioner (Appeals) erred in confirming the disallowance to the extent of Rs. 27,966 out of telephone expenses totalling Rs. 3,68,263. It is respectfully submitted that such disallowance is excessive.
18. For the reasons stated in the case of motor cars, we find that the disallowance made by the assessing authority in respect of telephone expenses is justified and. the quantum of disallowance is only reasonable. Therefore, this ground also fails.